the economic effects of violence and corruption -...

The economic effects of violence and corruptionA research and action agenda for Mexico

Texas A&M International University’s 2016-2017

International Bank of Commerce Keynote Speaker Series

Viridiana RíosFellow at The Wilson Center

Website: www.viridianarios.com

Twitter: @Viri_Rios

Email: [email protected]

Outline

1. Violence in Mexico

2. Corruption in Mexico

3. The Costs of Violence and Corruption in Mexico

4. Actionable measures

1.Mexico’s Violence

The extent of the problem

From 2007 to 2010, homicides in Mexico doubled

Map shows the distribution homicide rates per a 100,000 inhabitants in 2003. Source: INEGI

Homicides per year, Mexico 1997-2016

Year 2016 includes only until September. Source: SNSP, Homcidios dolosos del fuero estatal.

Why is Mexico violent?

Sometimes (and sometimes not)

Drug cartels fighting one another as a reaction to

enforcement operations conducted in politically

uncoordinated areas (Rios 2012)


Source: Transparencia Internacional (2010) Índice Nacional de Corrupción y Buen Gobierno; Casar, Ma. Amparo (2015) Anatomía de la

Corrupción en México, IMCO.

Mexico has extensive presence of criminal groups

Drug-trafficking routes from Mexico to USA. Source: Stratford 2013.

Presence of criminal organizations

Graph shows the number of municipalities where criminal organzations operate according to whether these are monopolistic (non-rivalry) or

competitive (rivalry). See Coscia, Michele, and Viridiana Rios. "Knowing where and how criminal organizations operate using web

content." Proceedings of the 21st ACM international conference on Information and knowledge management. ACM, 2012.

Homicides per year, Mexico 1997-2016

Year 2016 includes only until September. Source: SNSP, Homcidios dolosos del fuero estatal (1997-2016)

And most of this violence can be explained by drug-realted homicides

Year 2016 includes only until September. Source: SNSP. Intentional homicides of state jurisdiction (1997-2016). Database for deaths due to alleged

criminal rivalry (2006-2010)

2,760

6.825

9,592

15,258

Patterns of expansion differ greatly between cartels.

Big-Data constructed independent variable

See Coscia, Michele, and Viridiana Rios. "Knowing where and how criminal organizations operate using web content." Proceedings of the 21st

ACM international conference on Information and knowledge management. ACM, 2012.

Graph shows the number of municipalities where Zeta Cartel operated in 1993 according to whether these are monopolistic (non-rivalry) or



Presence of Zeta Cartel 1993

Violence diminished in states that managed to coordinate a

security strategy with the federation

Source: INEGI

2.Mexico’s Corruption

The extent of the problem

o 44% of Mexican firms pay bribes

o It is estimated that 200 million cases of corruption

happen every year in Mexico

o $1.7B USD are paid in bribes in Mexico every year

o 4% of the average construction contract value is spent in

bribes

Corruption is pervasive



14% of Mexicans’ income

is spent in bribes

Source: Transparencia Internacional (2010) Índice Nacional de Corrupción y Buen Gobierno.

Percentage who believe authorities are corrupt:

LOCAL POLICE

67%78%

TRANSITEPOLICE

65%

GENERALATTORNEYS65%

INVESTIGATIVE POLICE

JUDGES

66%

Mexicans distrust authorities

Source: ENVIPE 2015; slide designed by IMCO.

Do you think authorities follow the law?*

Mexicans distrust authorities

*Do not consider 16% who did not answer the question.

Source: IMCO (2015) “La Corrupción en México: Transamos y no Avanzamos” with data from Encuesta Nacional sobre Cultura y Prácticas

Ciudadanas (2012), Ministry of the Interior; slide designed by IMCO.

24.9%4.6%

70.6%

Never

Sometimes

Often

Where is corruption more common?

ACTION

CORRUPTION

INDEX

Avoiding a traffic ticket 68

Parking in a prohibited place 60.9

Avoiding seizure and impounding of motor vehicle 59.6

Introducing merchandise through customs 28.3

Recovering a stolen car 24.6

Avoiding criminal detention 23.2

Performing street vending 22.9

Getting trash collected 21.9

Getting water distributed 15.3

Initiating a judicial process 14.7

Obtaining construction permits 13



State level corruption

Nuevo León

8,745Durango

9,570

Jalisco

32,437

Nayarit

16,824

Oaxaca

27,195 Chiapas

11,298

Yucatán

18,505Campeche

15,268

Tabasco

20,115

Hidalgo

13,027

CDMX

30,891

Aguascalientes

8,456

Estado de México

24,834

Tlaxcala

21,718

Michoacán

20,752

San Luis Potosí

31,904

Baja California Sur

9,463

x > 30,000

30,000 ≥ x > 20,000

20,000 ≥ x > 10,000

x ≤ 10,000

Incidence rate of corruption 2013

The incidence is calculated corruption acts by 100,00 inhabitants (18 years or older that had contact with a public official). Gray if no data.

Source: INEGI (2015) “Encuesta Nacional de Calidad e Impacto Gubernamental”.

State level corruption

Sonora

33,256

Chihuahua

36,472

Coahuila

20,350

Tamaulipas

10,441

Durango

23,365Sinaloa

58,232

Jalisco

22,332

Nayarit

9,876

Colima

9,230

Guerrero

14,819

Oaxaca

19,414 Chiapas

14,116

Quintana Roo

18,186

Yucatán

21,584Campeche

17,460

Tabasco

16,343Veracruz

10,461

Hidalgo

26,962Querétaro

CDMX

25,889

Morelos

29,740

Aguascalientes

20,186

Tlaxcala

28,711

Guanajuato

17,259 Michoacán

29,144

San Luis Potosí

15,684

Baja California

24,351

x > 30,000

30,000 ≥ x > 20,000

20,000 ≥ x > 10,000

x ≤ 10,000

Incidence rate of corruption 2015

The incidence is calculated corruption acts by 100,00 inhabitants (18 years or older that had contact with a public official). Gray if no data.

Source: INEGI (2015) “Encuesta Nacional de Calidad e Impacto Gubernamental”.

Sonora

13%

Chihuahua

2%

Nuevo León

5%

Coahuila

1%

Tamaulipas

3%

Durango

4%Sinaloa

37%

Jalisco

14%

Nayarit

20%

Colima

3%

Guerrero

14%

Oaxaca

7% Chiapas

9%

Quintana Roo

17%

Yucatán

8%Campeche

0%

Tabasco

11%Veracruz

27%

Zacatecas

12%

Puebla

1%

Hidalgo

16%Querétaro

2%

CDMX

2%

Morelos

6%

Aguascalientes

2%

Estado de México

3%

Tlaxcala

7%

Guanajuato

1% Michoacán

30%

San Luis Potosí

9%

Baja California Sur

21%

Baja California

4%

x > 10%

10% ≥ x > 5%

x ≤ 5%

Share of policemen failing integrity testings

Source: Sistema Nacional de Seguridad Pública (SNSP)

Mexico is more corrupt than 57% of the world

95 of 168

countries

Source: Transparency International (2015) Corruption Perception Index.

Mexico more corrupt than 57% of the world

Source: Transparency International (2015)

Corruption Perception Index.

Corruption Perception Index over time

0

20

40

60

80

100

120

1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015

Co

un

try’

s ra

nk

ind

icat

ing

its

po

siti

on

rel

ativ

e to

oth

er c

ou

ntr

ies

in t

he

co

rru

pti

on

p

erce

pti

on

ind

ex

Brazil

USA

Mexico

Source: Transparency International (2015) Corruption Perception Index.

Why Is Mexico Corrupt?

THE “IT IS CONVENIENT” EXCUSE:

Source: Rodríguez Arregui, Emprendedurismo y Corrupción (2015); slide designed by IMCO

45%OpportunityHave given bribes in order to get a government contract

57%Red TapeUse “facilitators” to obtain information and privileged access

34%AdvantageArgue it is imposible to have a successful business without political

connections.

THE “IT IS BUSINESS AS USUAL” EXCUSE

Fuente: Rodríguez Arregui, Emprendedurismo y Corrupción (2015); slide designed by IMCO

11%

5%

21%

18%

43%

Absolutely

agree

Does not agree

or disagreeDisagree Absolutely

disagreeAgree

63% of businessman

consider corruption to be

“business as usual” in Mexico

33,090,263

1,681,077 163,446 108,216

THE “NOTHING WILL HAPPEN” EXCUSE

CRIMES COMPLAINTSBROUGHT TOAUTHORITIES

FORMALCHARGES

FILED

CONVICTEDCRIMINALS

5%OF CRIMES

RAISED TO

AUTHORITIES

99.7%IMPUNITY

Source: México Unido Contra la Delincuencia (2013) with data of ENVIPE 2013; Slide designed by IMCO

Fuente: Montes, Pesos sin contrapesos: corrupción y gobiernos locales, Índice de Competitividad Internacional 2015 (IMCO)

“NOTHING WILL HAPPEN” IS INDEED AN EXCUSE

In the last 16 years, Mexican press has reported 272

cases of corruption by Mexican governors

Source: Montes (2915) Pesos sin contrapesos: corrupción y gobiernos locales; Slide designed by IMCO

CHARGES NOT FILED

91.7%251 cases

8.3%21 cases

CHARGES FILED

3.The Costs of Violence and

Corruption

Most problematic factors for doing business

Note: From the list of factors, respondents to the WEF’s Executive Opinions Survey were asked to select the five more problematic factors for doing

business in their country and to rank them between 1(most problematic) and 5. The score corresponds to the responses weighted according to their

rankings. Source: The Global Competitiveness Report 2016-2017 (WEF)

Month-Year

% o

f spe

cial

ists

that

con

side

r th

at p

ublic

sec

urity

is

an o

bsta

cle

for

grow

th

Source: México ¿Cómo vamos? from “Encuesta sobre las expectativas de los especialistas en economía en el sector privado” BANXICO

Public security as an obstacle for growth

8-2016

5%

12%

19%

28%

26%

8%

Empirical specifications

Independent Variable Regression

Following related literature, we instrument with the log of lagged homicides.

Robustness tests were conducted having a dummy for drug-producing

states as instrument.

Results

2SLS specification, fixed effects by state, year and sector. Dependent variable is the rate of homicides loged. Instrument is average homicide rate

during the nineties (logged). Dependent variable is (1) herfindahl-hirschman index (HH) of added value, (2) HH of total gross production, (3) diversity as

calculated by Haussam & Hidalgo (2014) using added value, (4) diversity using gross production, (5) complexity as calculated by Haussam & Hidalgo

(2014) using added value, and (6) complexity using gross production). An increase of 9.3% in the rates of homicides reduces concentration by 57.7,

diversity by 0.87 and complexity by 0.23.

Results

2SLS specification, fixed effects by state, year and sector. Dependent variable is number of criminal organizations operating in a municipality.

Instrument is average homicide rate during the nineties (logged). Dependent variable is (1) herfindahl-hirschman index (HH) of added value, (2) HH of

total gross production, (3) diversity as calculated by Haussam & Hidalgo (2014) using added value, (4) diversity using gross production, (5) complexity

as calculated by Haussam & Hidalgo (2014) using added value, and (6) complexity using gross production).

Source: Author based in Rios (2015). The highest the value, the least such sector in affected by violence

0

0.2

0.4

0.6

0.8

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Ban

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Con

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Rec

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Rea

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rade

Resilient sectors

Sensitive Sectors

What we learned?

In addition to the impacts that crime has for the demand/supply of

production factors, crime affects the composition of the economy

It reduced the number of sectors that remain on business, the diversity of

subnational economies, and its complexity.

How much crime does it takes to make a sector disappear?

▷22.5% increase in homicide rates

▷9.8% increase in the number of operating criminal organizations.

Impact is larger if

▷ Homicides are caused by organized crime, rather than regular crime.

▷ Homicides affect rural areas.

o 5% less investment (FMI)

o Capital is 2% less productive per each point decrease in

Corruption Index (IMCO)

o 5% less annual sales (Ernst & Young)

o 480,000 less jobs per year (CEESP)

o 9.7% less informal labor sector jobs per each point decrease

in Corrupion Index (Saracho-ICRG 2015)

The economic costs of corruption

Source: Casar, Ma. Amparo (2015) Anatomía de la Corrupción en México, IMCO.

THE ECONOMIC COSTS OF CORRUPTION

GDP 2015 = $18,136 billion pesos*

5% of GDP = $907 billion pesos

*Original serie, GDP at current prices (4Q-2015). If $17.81 MXN = $1 USD, Mexico’s GDP is $1,018 billion USD.

**Federal Budget cuts announced in 2016 were equivalent to 132 billion pesos (SHCP 2015, Press Reseale).

Source: Banco de Información Económica, INEGI (2015), World Bank & SHCP; slide designed by IMCO.

= 5X the benefits of fiscal reform

= 2.5X the expected benefits of the energy reform

= 7X the Federal Budget cut**

Estimated GDP losses: 2-10%

Corruption favors big, well-connected firms

139

136

547

1,056

1,555

0 a 20

20 a 40

40 a 60

60 a 80

80 a 100

Source: Saracho (2015); slide designed by IMCO

Patents per one million economically active individuals

Cor

rupt

ion

Per

cept

ion

Inde

xINFORMALITY AND CORRUPTION REDUCE INNOVATION

4.Actionable Measures

1. Communicate Strategically

Actionable Measures

CREATE WELL-ENDOWED INSTITUTIONS

Source: Grandet y Jaury (2015) Lecciones internacionales del combate a la corrupción; slide designed by IMCO

Independent Commission Against

Corruption (ICAC)

Corrupt Practices Investigation

Bureau (CPIB)

Unidad Especializada en

Investigación de Delitos Cometidos

por Servidores Públicos y contra

Administración de Justicia (PGR)

- HONG KONG - - SINGAPORE - - MEXICO -

1,415 employees 88 employees 12 employees

2,006 million MXD $406 million MXD $26 million MXD

$120 MXD $60 MXD $0.05 MXD


2. Establish Legal Frameworks

Actionable Measures

Civil society took over

#Ley3de3 is Mexico’s civil society

war againts corruption

10 types of corruption, following United

Nations best practices

Protections for whistle blowers and incentives

for confessors

Coordinates 96 official authorities that

currently exist to fight corruption in Mexico.

Officials must declare assets and conflicts of

interest, and make tax records public.


2. Establish Legal Framework

3. Create Institutions

Actionable Measures

Committeeof Citizen

Participation

*GovernmentAccountabilityOffice (ASF)

*Anti-Corruption

General Attorney Office

*Federal Tribunal of

AdministrativeJustice (TFJA)

*Ministry of Public

Administration(SFP)

JudiciaryCouncil

(Consejo de la Judicatura)

NationalInstitute of Access to

PublicInformation

(INAI)

Thanks!Questions?

Viridiana Rí[email protected]

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